By Dwight Kay, Founder and CEO, Kay Properties and Investments

Last Updated: March 6, 2026

Real estate investors love Delaware Statutory Trusts for their 1031 exchanges because they can provide individuals a unique opportunity to defer capital gains taxes, eliminate active management responsibilities, and achieve the potential for regular monthly cash distributions. However, the first step to using the DST 1031 exchange real estate investment strategy is to first understand the pros and cons of the Delaware Statutory Trust.

This article jumps directly into very specific advantages and disadvantages of DST 1031 exchanges and provides readers a comprehensive look into this popular investment strategy.

What You Will Learn:

• Why are Delaware Statutory Trust 1031 Exchanges growing in popularity?
• What are some of the potential benefits of Delaware Statutory Trust 1031 Exchanges?
• What are some of the risks of Delaware Statutory Trust 1031 Exchanges to consider?
• What are Some Examples of Delaware Statutory Trust Properties?
• Frequently Asked Questions Regarding the Pros and Cons on Delaware Statutory Trust Properties.

A Delaware Statutory Trust is an entity that qualifies as “like-kind” real estate for the purposes of a 1031 exchange. The DST structure acts like a pre-packaged portfolio of real estate that allows investors to defer capital gains taxes following the selling of an investment property. To realize this benefit, investors direct the proceeds from the sale of their relinquished property towards purchasing a beneficial interest in professionally managed, high-quality institutional real estate. The type of real estate investors can choose for a DST 1031 exchange can be a variety of property types, including medical office, small bay industrial, distribution industrial center, or multifamily apartment complex.

Once the Delaware Statutory Trust investment goes full-cycle, the investor can also exchange the DST into a REIT (via a 721 UPREIT) but it may entail a lengthy process. The term “full cycle” refers to the complete life cycle of a DST investment, from when the real estate asset was initially acquired all ethe way through its ultimate disposition or sale.

As can be seen, there’s a number of Delaware Statutory Trust pros and cons, which we will inspect in the next section.

However, like all real estate related investments, Delaware Statutory Trusts have their pros and cons. Investors should carefully read the offering’s Private Placement Memorandum for the full business plan and risk factors prior to considering an investment.

This article discusses some of the potential advantages that are available to investors using DSTs for their 1031 exchange, along with a few disadvantages that investors should consider as well. 

However, before we explore the benefits offered by a DST let’s first explain what exactly is meant by a DST 1031 exchange.

It’s worth examining the benefits of the Delaware Statutory Trust as many highly experienced 1031 exchange investors have benefited from the DST structure. Some of these benefits include the following:

1. Eliminating the Headaches of Tenants Toilets, and Trash
2. Tax Savings with a Stepped-up Basis
3. Fast Closing
4. Accessing Long-Term NNN Properties
5. Using Potentially Non-Recourse Debt
6. Achieving the Potential for Diversification*
7. Investing in High-Quality Real Estate Assets
8. Estate Planning

The proverbial three T’s of active real estate management include, tenants, toilets and trash. Many investors are attracted to Delaware Statutory Trusts because they offer the potential for a 100% passive income stream. This feature is especially popular among those investors transitioning from an active real estate management role via a 1031 tax-deferred exchange. Active real estate management can be a time-consuming and tiring occupation which many property owners don’t want to continue into retirement. However, cashing out of a property held over a lifetime will usually incur a substantial capital gains tax hit that will erase much of the wealth that has been accumulated. Delaware Statutory Trusts allow an investor to utilize a 1031 exchange to acquire a professionally managed, institutional grade asset, which potentially provides monthly income without the headaches of property management and asset management.

One of the most powerful long-term wealth building features of a Delaware Statutory Trust investment is the potential for a step-up in basis for heirs. 

To break this down into simple language, when an investor passes away, their beneficiaries who inherit the DST interest receive a step-up in basis, meaning the value of the investment is adjusted to its fair market value at the time of the original owner's death. This adjustment eliminates the capital gains tax and depreciation recapture liability that had accumulated during the original owner's lifetime. For investors focused on legacy planning, this feature allows the wealth built up in real estate to transfer to the next generation with significantly less tax liability—a distinct advantage over many other investment vehicles. 

One of the greatest challenges of a 1031 exchange is the unforgiving timeline. With only 45 days to identify replacement property and 180 days to close, many investors find themselves racing the clock to avoid a failed exchange. After all, trying to purchase a single NNN property as a 1031 exchange property can be very challenging, such as financing not coming through, issues with third-party reports, etc. 

Delaware Statutory Trust properties, however, provide investors a distinct advantage in meeting these tight timelines of a 1031 exchange because these properties are already set-up for 1031 exchange investors. That means that each DST offering comes pre-packaged with building inspection reports, lease overview, environmental reports, lease overview, environmental reports, appraisals, and more. This pre-positioned structure allows DST investments to close in as little as 3 to 5 business days following the sale of the relinquished property. For investors concerned about missing exchange deadlines or those who value continuity of income, this rapid closing capability provides peace of mind and significantly reduces the risk of a failed exchange.

Another advantage of Delaware Statutory Trust investments is that they can offer investors access to triple net leased (NNN) properties that range from 5-20 years on the primary lease term, depending on the specific investment. This provides a potential long-term income stream without the hassle and risks of lease renegotiation. This is particularly relevant for investors who are moving to a Delaware Statutory Trust from a multifamily, apartment or single-family rental investment. Instead of dealing with multiple tenants renewing (or not renewing) their lease once a year, a Delaware Statutory Trust investor may potentially have 5-20 years of income already pre-arranged for. This both reduces the headaches of property management and provides a predictable and durable income stream. It is important to note that long-term leased properties, although attractive, can have problems too, such as tenants going out of business. It is important to review the tenant’s business model, credit rating, and future growth prospects to understand the level of risk one is assuming with a long-term leased property.

Most debt on Delaware Statutory Trusts is non-recourse which greatly limits an investor’s personal liability to the lender. This helps to protect an investor’s other properties, investments, etc., should an investment fail. Especially for those investors switching to a Delaware Statutory Trust in retirement – non-recourse debt adds an extra layer of safety. Non-recourse debt is typically defined as a loan whereby the lender’s only remedy in case of a default is the subject property itself and not the investor’s other assets. Many investors that purchase commercial, multifamily and triple net leased properties on their own are stuck with full or partial recourse loans from their lenders which increases overall risk substantially. With most Delaware Statutory Trust properties, non-recourse debt is enjoyed by investors.

Many 1031 exchange investors utilize Delaware Statutory Trust properties to satisfy debt-replacement requirements, yet those who do not have debt to replace, can choose debt-free DST real estate properties.

Delaware Statutory Trust properties provide access to large, institutional-grade real estate that is often otherwise outside of an individual investor’s price point. With the typical minimum investment of $100,000, investors are still able to purchase an ownership interest in large $20 million-plus multifamily buildings, $5 million-plus industrial centers, or $15 million small bay industrial park. This allows investors access to a level of real estate that they just would not have been able to exchange into before.

Delaware Statutory Trusts offer sophisticated estate planning advantages that go beyond simple tax deferral. 

First, as mentioned earlier in this article, the step-up in basis at death can permanently erase accrued capital gains taxes for beneficiaries. 

Second, DST interests can be divided among multiple heirs far more easily than physical real estate. A single-family rental property or commercial building cannot be split evenly among three children without a sale or complex legal arrangements. A DST, however, allows an investor to bequeath specific percentages of the trust interest to each beneficiary, simplifying the transfer of wealth. 

Third, the passive nature of DST investments means heirs are not suddenly thrust into the role of active landlords or property managers during a period of grief. They inherit income-producing, professionally managed assets without the burden of toilets, tenants, and trash. For high-net-worth individuals concerned with both tax efficiency and seamless wealth transfer, DSTs provide a compelling estate planning tool.

Although there are many benefits surrounding DST 1031 exchanges, there are also certain risks associated with them as well.  We strongly encourage all investors to closely review the risk section of the Private Placement Memorandum (PPM) in its entirety as well as talk with their tax and legal advisors prior to considering a DST 1031 investment.

However, here are five specific potential disadvantages of the Delaware Statutory Trust:

1. No Guarantees of Monthly Distributions or Projected Appreciation
2. Material Risks Associated with Real Estate Investments
3. Purely Passive Beneficial Interest
4. The Seven Deadly Sins” of the IRS Code 2004-86
5. Delaware Statutory Trust Properties are Illiquid.

One of the biggest potential hesitations investors might have about Delaware Statutory Trusts is their purely passive management structure for investors. As mentioned earlier, many investors are actually looking for a purely passive investment strategy. However, because the United States government understood that it might be concerning to remove direct management of any investment vehicle from the investor, the IRS Revenue Ruling 2004-86 is very clear that any DST investor must be a passive holder of real estate, and places specific restrictions on the trustee of the DST in order to protect the investor.

When the IRS issued Revenue Ruling 2004-86, it did more than just declare that Delaware Statutory Trusts could qualify as "like-kind" property for 1031 exchanges. It created a strict operational framework that DST trustees must follow to maintain that status. Industry professionals often refer to these requirements as "The Seven Deadly Sins", and in our experience of analyzing thousands of DST investments, we’ve seen that these rules are not negative, but are important guide rails to help protect investors.

For investors, understanding these rules is critical. They are not merely technical restrictions; they are guardrails that protect your passive investment by ensuring the DST operates exactly as the IRS intended—as a truly passive vehicle where investors can rely on the trustee to follow a predetermined path without making unilateral decisions that could alter the investment's character or risk profile.

Here are the seven rules that govern every compliant DST investment:

To get a better idea of what a typical Delaware Statutory Trust 1031 property investment might look like, along with some of the pros and cons, make sure to look at some actual DST property investment examples below. 

It's important to note that the following properties are fully subscribed DST examples and not available for investment and future offerings will vary. These are Regulation D Rule 506(c) DST offerings. If you'd like to see a list of currently available DST properties for 1031 exchange and direct cash investments from typically over 25 different DST sponsor companies with anywhere from 20 to 40 different DST offerings, please visit and register at www.kpi1031.com for current inventory.